Structuring a Keep-or-Drop Product-Line Problem

Shown below is a segmented income statement for Mullett Marinas three main boating service lines:

	Winter Storage		Boat Fuel & Concessions		Boat Maintenance		Total
Sales revenue	$4,000,000		$1,000,000		$5,000,000		$10,000,000
Less: Variable expenses	2,000,000		200,000		4,900,000		7,100,000
Contribution margin	$2,000,000		$ 800,000		$ 100,000		$2,900,000
Less direct fixed expenses:
Garage/warehouse rent	700,000		55,000		350,000		1,105,000
Supervision	50,000		70,000		150,000		270,000
Equipment depreciation	250,000		75,000		100,000		425,000
Segment margin	$1,000,000		$ 600,000		$ (500,000)		$1,100,000

Mulletts management is deciding whether to keep or drop the Boat Maintenance service line. Mulletts Boat Maintenance service line has a contribution margin of $100,000 (sales of $5,000,000 less total variable costs of $4,900,000). All variable costs are relevant. Relevant fixed costs associated with this line include 60% of Boat Maintenances garage/warehouse rent and 50% of Boat Maintenances supervision salaries.

Required:

1. Select the alternatives being considered with respect to the Boat Maintenance service line.

2. List the relevant benefits and costs for each alternative. Note: Enter all amounts as positive numbers except loss, if applicable.

	Boat Maintenance		Differential
	Keep	Drop	Amount
Sales	fill in the blank 2	fill in the blank 3	fill in the blank 4
Less: Variable expenses	fill in the blank 5	fill in the blank 6	fill in the blank 7
Contribution margin	fill in the blank 8	fill in the blank 9	fill in the blank 10
Less: Garage/warehouse rent*	fill in the blank 11	fill in the blank 12	fill in the blank 13
Supervision	fill in the blank 14	fill in the blank 15	fill in the blank 16
Total relevant benefit (loss)	fill in the blank 17	fill in the blank 18	fill in the blank 19

3. Which alternative is more cost effective?